Why I’m Not Closing this Lease Option Deal

by | BiggerPockets.com

When the market was hot I picked up a newer townhouse in a great subdivision. It was close to the highway and in a very desirable part of town. I got it from an absentee landlord who was tired of tenant hassles and was more than happy to enroll in my “guaranteed rent” program.

Of course I got immediate cash flow from the lease option deal and I also had substantial equity that would have given me a nice $70,000 payday.

Since this property was in such a great location I was quickly able to fill it with a tenant/buyer. The tenant/buyer gave me $7,500 in option money and has been a dream tenant. He’s always paid his rent on time and I’ve never had a problem over the last two years.

Recently he called me and said he was ready to exercise his option and purchase the property.

We started going through the motions of selling the property, however, the appraisal came in significantly below his option price. This is no surprise of course, because of the current state of the real estate economy. So what did I do?

I gave the tenant the option to stay for another 6 months and we’d re-appraise the property then and I even told him I’d be willing to give him a slight discount off of the original option price.

But the tenant wasn’t interested and frankly, I don’t blame him. He could easily get a property in the area for cheaper than I was willing to sell to him. You see, if this property was a dump in a war zone, I would be willing to give it away to him.

However, like I said, it’s a good property that I don’t mind holding onto for the next several years because I get healthy cash flow from it. I’m not willing to get rid of this property for nothing when I get can solid cash flow and make some money off of it in a year or two.

Should this ever happen to you, you have basically two choices…

You can sell the house to the tenant buyer for what it appraises for and lower your option price. (Assuming it’s not underwater). Or, you can give the tenant the option to stay longer and hope the equity increases over the next several months.

If you’ve got a great property I’d be in no hurry to sell, but if it’s a nightmare property don’t be foolish and hold onto it thinking you’re going to get the big bucks down the line.

By the way, this is only the second time this lease option situation has occurred to me and the first time the tenants chose to stay in the house indefinitely.

About Author

Jason R. Hanson is the founder of National Real Estate Investor Month and the author of “How to Build a Real Estate Empire”. Jason specializes in purchasing properties “subject-to” and has purchased millions of dollars worth of property using none of his own cash or credit.


  1. Jason, were you going to make any money on the deal? If you were going to make some profit, couldn’t you have just closed the deal and reinvested in another deal (assuming you could find a similar deal)?

  2. I’m trying to find a way to explain this to current homeowners with houses sitting stagnant on the market. Our small community has a record number of homes for sale, and hardly anything closing. Anything that does sell is going for less than asking price, often quite a bit, and the market is unlikely to recover in the next year or two. So I’m going to offer an option as a property manager.

    For example, one owner owns his home outright but wants to move to another state and be closer to kids. His home is sitting on the market and he doesn’t want to wait another year or two. So I provided a detailed explanation of benefits and he was astonished!

    He got an amazing deal on a new home, put 35% down and makes a payment of $600 monthly. Meanwhile, the home here rents for $1300. He gets new tax deductions (mortgage interest, depreciation, trips back to visit friends and check on the property, etc.) and he pockets $700 every month! If he had sold his home, he would have put it all down on the new house. Fewer deductions and $700 less in monthly income. That’s significant!

    Too many owners are selling at a loss or putting their plans on hold because they are “trapped” in their current house. Turning it into a rental can be a viable solution that provides immediate benefits and great benefits down the road when the market recovers!

    • One caveat: our rental market is STRONG! I manage 120 units, have 100% occupancy, and still get 5-10 people per day looking for something to rent. We’ve always had an unusually high occupancy rate, but it’s gotten tighter now that the housing market is slow. Which is all the more reason for owners to jump in now!

  3. What about owner financing the property to a buyer at a higher sales price?

    Since you are providing the loan with the property you can sell for above appraised value since you are a the lender.

  4. A property on a prime lot is just like a gold mine when it comes to income generation. As you mentioned earlier, it’s no surprise for your tenant to bring up the topic of buying off the property from you. But since income is still very lucrative (and probably will be that way for a long time), I agree on the option to hold on to the property for a few more years.

    Maybe after a few years, you can finally sell that to your tenant and by then, you should have enough savings to buy another property where you can start over with yourself.

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